I've been a skeptic. True, repeal of Glass Steagall was a major victory for banker power. Yet it has never been evident to me that breakdown the commercial/invstment wall had much to do with the current crisis. If breaking the wall did not create the crisis then reconsructing the wall--no matter how much banks hate it--might not be the solution. The enemy of my enemy is not necessarily my friend.
Adam Levitin, who just keeps getting better and better on mortgage/banking issues, weights in with a really good reason to regret the demise of Glass Steagall. It's part of a longish post that touches on several issues (worth reading in its entirety). But here is the Glass Steagall point:
The politics of regulation is where Congress really got it wrong with Dodd-Frank. The fundamental assumption underlying Dodd-Frank is that the financial crisis's root problems stemmed from a market that had out run regulation and that the fix was to be found in adding or subtracting some regulations. In other words, Dodd-Frank diagnosed the financial crisis as a regulatory problem. And there were certainly regulatory failures involved in the crisis.
But the real problem wasn't the regulations or financial economics, but the political economy of regulation. Put in lay terms, the problem was political not regulatory or financial. In most instances, federal regulators had the power pre-Dodd-Frank to have cracked down on many of the practices that led to the financial crisis, in both the mortgage market and the derivatives market. They simply failed to exercise those powers. What's more, Congress and particularly the regulatory agencies themselves engaged in significant deregulation. .
"Divide and conquer." Powers of the weak. Regulation a la Sun Tzu. Why didn't I think of that?
The fundamental problem in financial regulation is that bank regulators and large parts of both political parties in Congress have been effectively "captured" by the financial services industry....
Dodd-Frank didn't fix the dysfunctional political economy of financial regulation. And even if the Volcker Rule had been adopted in full measure (rather than gutted by Scott Brown), it wouldn't have made any difference. The last financial regulatory measure that really addressed the political economy problem was the Glass-Steagal Act of 1933.
No one every conceives of the 1933 Glass-Steagal Act as a political economy move, but by splitting the investment banks from the commercial banks, it divided the financial services industry, which meant (1) that each segment had much less weight to throw around, and (2) they could be played against each other. That was the story with the passage of the Trust Indenture Act of 1939 (William O. Douglas got the commercial banks to support the legislation to screw the investment banks out of the indenture trustee business), and the story of a lot of turf war litigation between commercial banks, investment banks, and insurance companies. All of that ended with the Gramm-Leach-Bliley Act of 1999, which created a financial services lobbying Vultron, much more powerful than the sum of its parts. In retrospect, the political economy effect might have been the most important aspect of Gramm-Leach-Bliley. The Volcker Rule wouldn't undo this political economy effect.
So we're still in a situation in which the fate of financial regulation is decided not on its merits, but by political clout....